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Chennai High Court Upholds The Significance Of Appointed Date In Merger

The Chennai High Court ("Court") has in a recent case considered the validity of a filed revised return, following the scheme of merger and demerger ("Scheme") approved by the order of the High Court. Taxand India analyses the case and the ruling made by the Court.

The Taxpayer [surviving company by the name of Mayajaal Entertainment ('Company')] and one of the transferor companies (Pentamedia Graphics Limited) filed a Scheme of Merger and Demerger (i.e. a composite scheme which also included other transferor companies) with the Chennai High Court. The Scheme specified 1 January 2004 as the appointed date.

The Courts (Calcutta and Chennai High Court) approved the Scheme on 12 October 2004 and 8 November 2004, which was subject to certain conditions being met including the listing of shares of the Company with BSE.

The Company applied for listing with BSE and applied to the Court for issue of directions to BSE for listing its shares. The Court rejected the application and directed the Company to approach Securities Appellate Tribunal.

Meanwhile, the Company shelved the plan of listing its shares and applied for modification of the Scheme with the Court. The Court, by order dated 29 November 2007 approved the modified scheme with the only modification being the dropping of the condition in relation to the listing of shares. The appointed date for merger and demerger remained unchanged. The order of the High Court was received on 20 December 2007.

The Taxpayer filed a revised return of income on 27 December 2007 in agreement to the final order of the Court approving the Scheme. Since the Scheme was approved without changing the appointed date (1 January 2004), the Taxpayer filed the revised return in order to claim the benefit of the losses brought forward of the transferor company in accordance with the provisions of the Act. However, the Revenue Authorities refused to entertain the revised returns on the ground that the time allowed for the filing of the revised return had lapsed.

The Court held that the effective date for the merger and demerger in the present case would be 1 January 2004 i.e. the appointed date mentioned in the said Scheme. The Court went on to hold that the Revenue Authorities are bound to act as per the Scheme sanctioned with effect from 1 January 2004 and to take note of the state of affairs as on that date and a return reflecting such state of affairs cannot be ignored on the basis of a statutory limitation placed on filing of revised returns.

Taxand's Take

The High Court has clearly laid down the principle that once the Court sanctions a scheme with an appointed date, the Revenue Authorities have to give effect to it and cannot rely on a statutory limitation of the Act to reject the revised return.

The principle laid down by this Court is extremely important since, in many cases, there is a considerable time lag between the appointed date mentioned in a scheme of merger and the actual sanctioning of such scheme resulting in several practical difficulties such as filing of revised returns, refund claims, etc. The decision of Court will be extremely useful in such situations to enable the Taxpayers to claim appropriate relief based on the sanctioned scheme.